Being an entrepreneur takes a lot of skills in various fields. If you want to be one of the more successful business owners, you have to understand how to manage your finances.
50% of small businesses fail within five years, and 70% within ten years. The main reason they don’t stay afloat is because of money issues. When you’ve invested your life savings or have taken out a large loan, this can be scary.
You need to know the best ways to manage your personal finances. We’re here to give you some tips.
Maintain a Good Credit Score
A good credit score is 700 or above. It’s made up of a few criteria which include, paying on time, your credit utilization ratio, how long you’ve had a credit history, what types of credit you have, and if you’ve recently received more credit. So, why is this important for an entrepreneur?
If you’re looking to expand your business but are short on funds, the best way to do this is by taking out a loan. Having a good credit score will give you access to quick approvals and a more substantial amount. On top of that, you’ll receive a lower interest rate, which will save you a lot of money in the long run.
A good credit score is vital for leasing office spaces or buildings. It will show the landlord that you’re responsible and pay your debts on time and aren’t swarmed in debt.
You can use your credit score to attract investors. They’ll understand you’re serious about your business and have your finances under control. Taking care of your credit score is essential for your personal finances and your business finances.
Plan for Bumps in the Road
You started your business, and it’s becoming more successful. Now you want to buy a bigger home, or go on a luxurious vacation with your new income. You can treat yourself once in a while, but remember that many entrepreneurs have irregular income.
In the beginning, there’ll be a buzz surrounding your new business in town, but after a few months, your income could drop or flat line. If you have a seasonal company and something happens, like a global pandemic, your sales will fall when you usually make most of your income.
Maintaining a savings account will help you immensely with an irregular income. It’s a security blanket to know that you’ll be able to make it through tough times.
Have Business Insurance
Once you become a business owner, anything that happens is your responsibility. You can be sued, an employee might be injured, or a natural disaster could damage some of your property. Insurance will help cover some of, if not all, the expenses when there’s an accident or misunderstanding.
Without insurance, you might find yourself with a huge bill that needs to be paid, and it could wipe out your business and personal bank accounts completely. Slip and falls happen all the time. The average cost of this type of accident is $20,000, which you would have to pay out of pocket without insurance.
In addition, consider what other types of coverage would be useful to you and your family. This will include a variety from home to life insurance.
Have an Accounting System
Entrepreneurs have to file taxes, just like the rest of us. It’s more complicated because you have to keep track of your income. A W-2 form isn’t sent to you already calculated.
Many online systems manage how much income you’re making and what your business expenses are. This way, at the end of the year, you have everything calculated for you, and you can send it to the IRS.
You can also use your accounting system to observe growth from year to year, and areas you need to cut back on. This system will give you a clear look at your personal and business finances.
The Bottom Line
Managing your income and how you spend your money on your business plays a huge role in the success of it. You want to stay conservative with what you’re spending, but also pay to expand with the hope of a return in the future. It’s essential to find a balance.
Be sure to maintain a good credit score, plan for irregular income, have insurance for your company, and utilize an accounting system to keep things on track.